Investors are increasingly pouring money into mutual funds that are able to bet that the stock market will tumble.
Many of the funds are aimed at typical investors looking for positive returns during a choppy time on Wall Street.
Long-short funds, which allow money managers to own stocks outright, as well as short-sell stocks – those which an investor thinks will fall – have seen their assets swell recently, according to Morningstar Inc., the Chicago-based fund researcher.
Through May, inflows to long-short funds this year were $1.51 billion. That’s up from $732 million added during the similar period a year ago.
That’s still tiny compared with U.S. domestic equity funds as a whole, which have added $37.4 billion through May.
“We think the average investor will continue to use these (long-short) strategies,” said David Prokupek, founder of Denver- based Geronimo Financial.
Prokupek said long-short funds are akin to hedge funds – private investment partnerships reserved for individuals or institutions – because they offer a variety of investment strategies that hedge against a market downturn.
But unlike hedge funds, which often require a net worth of more than $1 million and lack the transparency of mutual funds, some money managers are now rolling out funds that incorporate hedgelike strategies.
Geronimo Financial in January launched three mutual funds that use long-short strategies, all with $1,000 minimums.
“(Long-short) funds have gotten some attention because of the perception that they are hedgelike investments that the average Joe can get into,” said Jeff Tjornehoj, a senior research analyst with Lipper Inc. in Denver. “But they are not appealing to the broad swath of investors.”
He said long-short funds “have done OK” – up an average of 4.9 percent this year.
The broad Standard & Poor’s 500 index is up 1.4 percent year to date.
He noted that long-short funds generally charge more than most mutual funds, with an average management fee of 2.1 percent. The average fee for mutual funds is about 1.5 percent.
Another drawback is that long-short funds often suffer when the stock market soars, Tjornehoj said.
“If the market suddenly takes flight, these funds will miss that pop,” Tjornehoj said. “(But) if you think the stock market is poised to roll over, these (funds) are in a better position.”
Staff writer Will Shanley can be reached at 303-820-1260 or wshanley@denverpost.com.
